The government avoids additional G-sec borrowing for FY20 – cuts down on buybacks. FY21 fiscal deficit to be financed by a marginal increase in net G-sec borrowing and increased reliance on small savings fund.

Tax revenue numbers for FY21 seems more realistic than FY20 estimates. Government expenditure would continue to support GDP growth as private consumption and capex growth remains muted.

As widely expected, personal income tax rates were cut but with a big catch – taxpayers need to choose between the new tax structure or the old one.

Revenue receipts to grow at 9% in FY21, down from 19% for FY20 RE. Overall, tax revenue growth numbers are significantly toned down.

Disinvestment target lowered for FY20 to Rs 65,000 crores. FY21 BE on the higher side – dependent on Air India, privatization of IDBI bank and LIC stake sale.

Expenditure expected to grow at 13% in FY21 BE, supported by 18% expected growth in capital expenditure including transport and parts of health, agriculture and rural development expenditure.

Our take on some of the key Budget announcements:

As widely expected, personal income tax rates were cut but with a big catch – tax payers need to choose between the new tax structure or the old one. Those choosing to go with the new structure will not be allowed deductions / exemptions thereby reducing the effectiveness of the lower tax rates. Lower tax rates could potentially boost consumption but also impact household savings rates which have been dropping over the last few years, as tax payers opting for the new structure would have lesser incentives for saving without tax exemptions. Also, having two tax structures increases the complexity for taxpayers as they are required to pick one of them.

The government reiterated its commitment to double farm incomes by 2022 through incremental measures, i.e. increasing allocation to existing schemes without any fresh measures being announced. These would result in incremental growth in rural consumption over the medium to long term.

The government has estimated a nominal GDP growth of 10% for fiscal 2020-21 indicating a slow recovery in the economy. Further, although the government has deviated from the fiscal consolidation path laid down by FRBM by the permissible limit of 0.5% for FY20 and FY21, the additional spending appears to be focused on improving growth & social welfare over the medium to long term rather than an immediate/near term boost.

An area of concern for the economy has been slow job creation relative to the high growth in work force participation– resulting in slowing consumption. Measures undertaken such as infra spending, might result in job creation for the labor class. But no significant measures to boost employment for the literate workforce.

Equity markets reacted negatively to the budget with market indices correcting by 2% to 3%. We believe that measures taken by the government over the last few years with focus on improving ease of doing business, quality of livelihood in rural areas, infrastructure spending, etc. should result in better economic growth over the medium to long term. Whether these growth rates are sufficient to boost job creation for India to enjoy its ‘demographic dividend’ remains to be seen.

To learn more about how we have positioned Morningstar Managed Portfolios and other key highlights of the Budget, access the full report here.